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Law360 (February 25, 2021, 5:39 PM EST) --
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| Mark Johnson |
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| Eric Greenberg |
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| Bessie Fakhri |
In a recent opinion, a Massachusetts trial court ruled in UMNV 205-207 Newbury LLC v. Caffé Nero Americas Inc. that a commercial tenant was excused from paying rent while indoor operations were barred by government order during the spring of 2020. The court's cogent opinion proves instructive for the many businesses pursuing and defending against these actions.
The Parties' Lease
The landlord, UMNV 205-207 Newbury LLC, and tenant, Caffé Nero America's Inc., entered into a lease for a retail space on Boston's Newbury Street.[1] The lease stipulated that Caffé Nero could use the premises solely for "the operation of a Caffé Nero-themed café," only offering takeout sales from "its regular sit-down restaurant menu."[2]
On March 24, 2020, in response to the COVID-19 outbreak, Massachusetts Gov. Charlie Baker issued a statewide executive order barring on-premises dining.[3] A few days later, Caffé Nero advised the landlord that it could not pay rent while it was forced to close under the governor's order.[4]
The Doctrine of Frustration of Purpose
Caffé Nero, unable to negotiate a compromise with the landlord, eventually vacated and relinquished possession of the premises.[5]
In the subsequent damages action pending in Massachusetts Superior Court to recover rent during the shutdown period through October when Caffé Nero relinquished possession, the landlord moved for partial summary judgment on its breach-of-contract claim, including seeking an award of damages for unpaid rent during the period when Caffé Nero was prohibited from operating its premises due to governmental order.[6]
In a well-reasoned opinion issued on Feb. 8, 2021, Superior Court Judge Kenneth Salinger found the landlord's motion without merit and instead granted partial summary judgment in favor of Caffé Nero on the issue of unpaid rent during the shut-down period, notwithstanding the fact it had not filed a cross-motion seeking judgment in its favor.[7]
The court concluded that Caffé Nero's obligation to pay rent during the shutdown period was discharged by the doctrine of frustration of purpose, and that the lease's force majeure clause, which implicates the doctrine of impossibility, was inapplicable.[8]
In arriving at its decision, the court cited Section 265 of the Second Restatement of Contracts, which provides that where a party's principal purpose under a contract:
The court observed that the frustration doctrine has been invoked to discharge obligations to pay rent where a government order frustrated the objective of the lease, as in the case of restrictive zoning ordinances.[10]is substantially frustrated without his fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.[9]
Judge Salinger further distinguished the frustration-of-purpose defense with the related doctrine of impossibility of performance, explaining that frustration excuses nonperformance "even though it is possible for the party to perform its contractual obligations, but the expected value of that performance has been destroyed by an unforeseeable event."[11]
That is, frustration serves to discharge a contractual duty even where the promisor's performance is not objectively impossible.
Applying the doctrine of frustration, the court concluded that Caffé Nero's continuing obligation to pay rent was discharged because the entire purpose of the lease was completely frustrated during the shutdown period.[12] Judge Salinger highlighted the lease's covenant that the leased premises could be used as a sit-down café "and for no other purpose" as support for its ruling.[13]
While the frustration doctrine only applies where the disrupting event is unforeseeable, the court found no evidence that the risk of a global viral pandemic and the industrywide shutdowns it occasioned were something that could have been foreseen by the parties.[14]
The court also concluded that nothing in the lease, including its force majeure clause, allocated the risk to Caffé Nero so as to preclude the frustration defense.[15] The lease's force majeure provision stated that neither party would be liable for failure to perform if prevented from doing so "by any governmental authority ... or for any other cause beyond its reasonable control."[16]
The clause, consistent with most commercial leases, carved out an exception for nonpayment of rent.[17] Significantly, the Caffé Nero court opined that this provision had no material bearing on the frustration doctrine because the force majeure clause only applied when performance became impossible — i.e., a party was prevented from performing — not the situation at issue, when Caffé Nero's performance in the form of paying rent was still possible, but the underlying purpose of the lease was substantially frustrated.[18]
The court concluded that because "frustration of purpose is a different issue, arises under different circumstances, and [was] not addressed by the force majeure provision."[19] That clause, therefore, did not foreclose application of the frustration defense to excuse Caffé Nero's nonpayment of rent.
Takeaways
Old common law doctrines may not be dormant.
While frustration of purpose is a well-established defense, the global pandemic and sweeping government shutdowns presented a novel application of the doctrine. The Caffé Nero opinion is unique in its discussion of the nuanced, but legally distinct, common law doctrines of frustration of purpose and impossibility as affecting a commercial tenant's obligation to pay rent during periods of government-ordered shutdown.
Whereas many published decisions thus far have tended to blur the lines between the two doctrines, this case provides clear guidance on the operation of the doctrines in present circumstances, observing that the typical force majeure clause addresses a party's inability to perform (impossibility), not whether the purpose and value of performance, though still possible, has been destroyed (frustration of purpose).
Also of import is Caffé Nero's holding that the lease's force majeure clause did not foreclose application of the frustration doctrine. Most commercial leases include a substantially similar provision, and landlords in recent litigation have advanced the type of argument asserted by the landlord and ultimately rejected by the Caffé Nero court.
Lease parties should review their force majeure clause.
Landlords, tenants and legal practitioners evaluating potential claims and defenses would be well served to consider, in the first instance, whether the lease contains a force majeure clause that (1) defines governmental laws, regulations, restrictions or public health issues as events of force majeure and (2) carves out an exception for monetary obligations, as most courts will initially refer to the language of the lease.[20] If so, then landlords may want to press this defense, despite its limited application to the common law defense of frustration of purpose.
On the other hand, tenants in that circumstance would not want to cite either the force majeure clause or rely upon the doctrine of impossibility as excusing the obligation to pay rent. However, where either (1) or (2) are not present in a lease, tenants may be afforded more latitude to rely upon the force majeure clause itself and/or the doctrine of impossibility.[21]
Tenants should always consider a frustration of purpose argument.
Regardless of the application of a force majeure clause or the doctrine of impossibility, the Caffé Nero opinion teaches that tenants should always rely upon the doctrine of frustration of purpose.
If the tenant can satisfy the elements of that defense, which are generally consistent among most states' common law, this defense could serve as a powerful tool to avoid the obligation to pay the full amount of rent specified by the lease during the period of closure to the public and the tenant's inability to conduct ordinary operations resulting from government-ordered shutdowns.[22]
Indeed, as the Caffé Nero court noted, even where the tenant's performance (e.g., payment of rent) could still be possible the doctrine of frustration applies where "the main purpose of the Lease is frustrated by events not in the parties' control."[23]
Conclusion
In short, while the contours of excusability defenses, particularly frustration of purpose, in the wake of COVID-19 are still developing, the ruling and reasoning in Caffé Nero should be kept top of mind by practitioners and their landlord and tenant clients.
This case may be appealed by the landlord and other similar cases are still working their way through court systems across the country — the COVID-19 landlord-tenant case law is still evolving.
However, since the beginning of the pandemic, preliminary results of COVID-19 litigation involving force majeure and the common law doctrines of impossibility and frustration of purpose have tended to skew in favor of landlords.
The Caffé Nero ruling serves as a wake-up call to landlords that other courts may likewise find these old common law doctrines to apply to the COVID-19 pandemic, as there has been no compelling precedent established thus far.
This could result in landlords and tenants being more willing to negotiate lease modification agreements in order to control their own destiny and business strategy, while avoiding unpredictable and unwanted results in court, especially appellate-level rulings that will create truly precedential value.
Mark Johnson and Eric Greenberg are partners, and Bessie Fakhri is counsel, at Seyfarth Shaw LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] UMNV 205-207 Newbury, LLC v. Caffé Nero Americas Inc., No. 2084CV01493-BLS2, op. at 2 (Mass. Super. Ct. Feb. 8, 2021).
[2] Id.
[3] Id. at 3.
[4] Id.
[5] Id. at 5.
[6] Id. at 1.
[7] Id.
[8] Id. at 12.
[9] Id. at 5 (quoting Chase Precast Corp. v. John J. Paonessa Co
., 409 Mass. 371, 374 (1991).[10] Id. (citing R&F Fin. Servs., LLC v. Cudd Pressure Control, Inc
., No. 20190287, 2021 WL 99733, ¶¶ 17-21 (N.D. Jan. 12, 2021).[11] Id. at 6.
[12] Id. at 7.
[13] Id. at 7-8.
[14] Id.
[15] Id. at 8-9.
[16] Id. at 8.
[17] Id.
[18] Id. at 9.
[19] Id. at 10.
[20] In fact, parties should consider all applicable contractual defenses in the first instance. Contractual provisions that have been implicated during the COVID-19 era in addition to force majeure include, among others, co-tenancy failures, breaches of covenant of quiet enjoyment, and casualty provisions.
[21] See, e.g., In re: Hitz Rest. Grp.
, 616 B.R. 374 (Bankr. N.D. Ill. 2020) (restaurant relied upon the lease's force majeure clause, which specified "government action" as an event of force majeure and did not contain a carve-out for the obligation to pay rent, to avoid paying full rent during the period of shut-down, with the court concluding that the restaurant's obligation to pay rent during the impacted period was reduced to 25% to reflect that it was able to use the premises for curbside pick-up and take out services).[22] See, e.g., Intern. Plaza Assoc. L.P. v. Amorepacific US, Inc., 2020 WL 7416600 (N.Y. Sup., Dec. 14, 2020) (court denied landlord's motion for summary judgment on its claims to recover unpaid rent from retailer affected by government orders in the wake of COVID-19 where retailer pled the defense of frustration of purpose, so retailer could present evidence to support its defense).
[23] UMNV 205-206, No. 2084CV01493-BLS2, op. at 6, 9.
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